Derivatives Lobby Has U.S. Regulators On The Run

The derivatives industry is squeezing Washington like a python. Desperate to control the tone and thrust of derivatives regulation, industry lobbyists have been swarming over the Commodity Futures Trading Commission and the Securities and Exchange Commission, each of which is writing derivatives rules as mandated by the Dodd-Frank reform law.

In case their lobbying falls short, the industry -- largely dealer banks and commodities firms -- has been pushing legislation that would pre-empt the rulemaking process and tie the agencies’ hands. So far, no fewer than 10 such derivatives bills have been introduced in the House; two have passed and several more have cleared committee.

Not satisfied with that, influential lawmakers have been not so subtly warning regulators to go easy on derivatives. This is incredibly intimidating: Congress controls the agencies’ budgets, and the increase in workload mandated by Dodd-Frank leaves them woefully short on funds.

And should a derivatives rule unpalatable to the dealers somehow survive this Beltway obstacle course, the agencies face an explicit threat of a lawsuit. This has had a chilling effect. As Bart Chilton, a CFTC commissioner, told me, regulators fear there is “litigation lurking around every corner and down every hallway.”

Banks note that their customers are clamoring for derivatives. But health-care consumers also clamor for drugs and treatments, not all of which are useful. “The great question,” says Wallace Turbeville, a former Goldman Sachs Group Inc. banker and now a senior fellow at Demos, a liberal think tank, “is ‘Why do companies hedge the way they do?’”